China’s central bank has not made any public statements about bitcoin since it issued a guideline on December 5 classing it as a virtual commodity rather than a currency. But in May it appeared to adopt a stricter interpretation of its own guideline, banning banks from facilitating transfers to bitcoin exchanges and sparking rumours of a government backlash.
Cutting off the banks could have turned Chinese exchanges into cash-only venues but BTC China and others have flouted the ban by using a network of thousands of middlemen to channel funds to the exchanges through an online voucher system.
Isn’t it risky to go against the central bank?
“The truth is that bitcoins are legal,” said Lee. “This is just how things work in China.”
Rich speculators have not helped the situation, he said, suggesting that connected individuals in China might have used their influence to spread rumours of a ban as part of a scheme to drive the bitcoin price down.
In the face of such a confusing environment, responsible industry players in China now welcome the opportunity to be regulated.
That will probably happen later rather than sooner, given the government’s preferred wait-and-see approach to regulation. “China doesn’t like to be first,” Lee said. “They will want to see what happens elsewhere first.”
The US will probably serve as a model for China, ultimately. Until then, the industry will continue to evolve in the shadows.
Bitcoin demand remains strong in China, despite all the problems but it is almost entirely speculative at this point. End-users of bitcoins are still rare. However, the vibrant and unregulated growth of internet finance such as peer-to-peer lending, Lee said, provided an opportunity for bitcoin to exploit its strength as an instant, verifiable, and irrevocable form of payment.
The biggest obstacle is adoption. Credit and debit cards in China are already relatively cheap, so the low-cost of bitcoin transfers is less of a draw, and the bitcoin industry itself still suffers from a reputation problem — which is not helped by its forced dissociation from the regulated banking industry.
The wild reputation is not undeserved. Even Lee questioned the value of exchanges that offer margin-trading of bitcoins or that loan out customers’ bitcoin deposits in what he described as a “fractional-reserve system.”
One of the ironies of bitcoin is that it is touted as a decentralised system, outside the control of any government or corporation, yet in practise most bitcoin owners entrust the secure storage of their virtual wallet to a centralised entity such as an exchange — few of which have any kind of track record to inspire trust.
The dangers of this are obvious. “Hackers are everywhere,” said Lee.
They attack both exchanges and individuals, either directly or through phishing scams, and this is why most people feel it is safer to trust the exchange than to try to thwart the fraudsters themselves.
Mt Gox, once the world’s biggest bitcoin exchange, demonstrated the risks in February when it lost 850,000 bitcoins (worth $450 million at the time) in circumstances that remain a mystery but appear to be linked in some way to hacking.
Since Mt Gox's collapse, BTC China has become the world's biggest and longest-running bitcoin exchange, having started operations in June 2011. It received $5 million of funding from Lightspeed Venture Partners in November.